Out for the Count?

The new IPD Guide on Outsourcing includes 'payroll management' as one of the personnel-related functions that are being put out to specialist service providers. However, the use of the term "outsourcing", in the payroll context, is confusing.

For many years, countless payroll bureaux have offered to do the payroll processing, that part of paying employees that involves the "gross-to-net" calculation for each employee. Typically, the employer's payroll department collates the pay data and sends it to the bureau. The bureau does the processing, sends the transactions to BACS, and prints the payslips and reports. This has generally been the extent of payroll outsourcing, although the larger bureaux offer a wider range of complementary services.

Today, the major payroll bureaux (or payroll service providers, as they prefer to be called) also offer a "fully-managed service", the term they use to distinguish it from outsourced processing. The benefits of "total outsourcing", as it is also known, have been well rehearsed. Payroll falls outside of the organisation's core business and requires specialist skills and knowledge that are expensive to maintain. Better, therefore, to give the whole job to a payroll bureau, for whom maintaining the necessary expertise is critical. These arguments, however, are not new to countless thousands of small employers who have traditionally relied on their accountant to relieve them of any direct involvement in paying their employees.

According to the recently-published Inland Revenue report on the compliance costs borne by employers in collecting income tax and NI contributions, small employers have very high costs, up to £300 per employee per year, compared with around £5 per employee per year for the largest employers. The relatively high payroll costs for small employers with manual payrolls are attributed to "the time involved in reading the relevant literature, understanding the system and keeping up-to-date with changes". It is not surprising that small employers contract the payroll to their accountants.

Surprisingly, however, the report suggests that this is not such a good idea. It comments, "While there are good reasons for using such professional help, it is not appropriate for routine payroll work which is usually much more cheaply done in-house or by a part-time book-keeper. Resort to accountants is one reason why compliance costs are so high for small employers."

Do such concerns over the fully-managed service offered by accountants have any read-across to the larger scale service offered by payroll bureaux? What are the issues that need to be considered before replacing the in-house payroll department?

One situation where full payroll outsourcing seems to be the ideal solution is when a company splits away from its parent and has no payroll department of its own. In 1997, Castle Transmission International Ltd. separated from the BBC and needed to source its own HR and payroll systems. The BBC payroll is processed by Rebus Human Resource Services and it made sense for Rebus to provide the full payroll service for the new company. Priya Kumarasinghe looks after Castle Transmission's HR systems and is the payroll link with Rebus. She says that the relationship with the two dedicated payroll staff at Rebus works very well. "Good communication is one of the most important success criteria," she suggests. "Things change so quickly in business and the service provider needs to be responsive. It's no good to be told that what I need doing can't be done immediately. Easy access to payroll information is essential to produce business reports and, if I want to make last minute changes to payments, there has to be enough flexibility to work around the deadlines."

The need for good communication was also highlighted by Ed Ramshaw, marketing director for Cyborg Systems. How does an organisation that no longer has its own internal payroll department get immediate cost information about employees? "This is an issue that should not be overlooked," he explains. "If the business requires immediate access to payroll information, for example, employment costs for union negotiations, we address this initially when agreeing on the level of service required. If the culture of the business is such that payroll is simply expected to pay employees, this does not tend to be an issue. But, if there are close links between payroll and HR, the need to provide the business with the information it needs at a moment's notice, as an in-house department might be required to do, has to be understood clearly by the service provider."

This suggestion, that an employer might have a critical dependency on the cost information that is only available from the payroll, calls into question one of the basic premises of outsourcing. Can the payroll operation really be split off from the core business, as is commonly done with catering and cleaning? If strategic employment policy-making relies on cost information from the payroll, how wise is it to give that information to someone else to look after?

These were important issues to Margaret Evans, director - head of payroll at Warburg Dillon Read, when she was asked to consider the payroll outsourcing option by her previous employer. After a thorough investigation, the decision was to leave the payroll in-house. Why? "One factor was the high level of service that my payroll department provided, especially in handling the complex payments of an international banking operation," she recalls. "Perhaps more important, though, was our active involvement in HR and all of the other business areas of the bank."

Does she think that payroll is a candidate for full outsourcing? "Why not?" she asks. "If the payroll department simply exists to produce payslips, and is pretty unhelpful, and is perceived as an overhead, then why not give it to a bureau to do? But that is not the role that payroll should be playing in a modern business."

What should it be doing, then? "This is the role my department plays," she explains. "Payroll must be client-oriented. First, every employee in the organisation is a client and the individual service must be second-to-none. Nothing must be too much trouble. Never say "can't". Second, all of the managers, and especially the budget-holders, are clients and should be able to rely on payroll to help them with one of their biggest headaches, managing their headcount and employee costs, and reconciling them with their GL charges.

"And there's more," she continues. "Payroll should be involved in every situation where compliance with income tax law is critical, for example, redundancy and termination payments, reporting benefits on P11Ds, and close involvement with expenses policies and employment status issues. I find it hard to imagine how a department that is so closely involved in the business can be outsourced."

Not all payroll operations are entrusted with such a comprehensive brief. Outsourcing of payroll is a growing trend and many organisations will find it a practical and efficient way to go. The advice given in the article "Falling in with the out crowd" in People Management of 15 October 1998 is worth reviewing, as well as the IPD Guide on Outsourcing. Make sure your chosen payroll service provider is responsive, flexible, and provides immediate access to your costs, in one way or another. Consider carefully whether you can really afford not to have your payroll operation in-house.

Sources: The Tax Compliance Costs for Employers of PAYE and National Insurance in 1995-96, prepared by the Centre for Fiscal Studies, University of Bath, and published by the Inland Revenue.